Risk & Compliance

SEC Enforcement Actions Shoot Up

Fourteen percent more cases have been filed this year, largely due to the number of backdating cases.
Sarah JohnsonNovember 12, 2007

Increases in backdating and insider-trading cases have kept Securities and Exchange Commission enforcers busier this year.

The SEC has filed 14 percent more enforcement cases in its most recent fiscal year, according to Bloomberg. The commission brought 656 cases accusing companies of violating securities laws through September 30, nearly 100 more than in 2006.

SEC enforcement director Linda Chatman Thomsen shared those numbers over the weekend at a Practising Law Institute event. She attributed one-third of the cases to companies not providing the correct disclosures in their financial statements, Bloomberg reported. Those types of cases composed 33 percent of the SEC’s civil or administrative enforcement proceedings in the past year, compared to 24 percent in 2006.

Some of those improper disclosure cases involve SEC findings that companies did not share enough information with investors when they allegedly misdated stock-option grants. The backdating controversy has partly fed the higher number of enforcement cases.

Thomsen hinted that the SEC will be bringing even more enforcement actions in this area in the year ahead, Bloomberg reported.

At the same time, however, the SEC seems to be letting more companies once suspected of backdating off the hook. As CFO.com reported last week, the commission has actually been whittling down its list of possible backdating cases by giving companies no-action letters. Earlier this month, at least four companies revealed that the commission had dropped their informal inquiries into their past stock-option granting practices.

Some of them, such as NVIDIA Corp., had restated their financials to make up for options whose grant and award dates didn’t match. The SEC letters were received as much as a year after the probes were opened.

Since University of Iowa professor Erik Lie uncovered the issue in 2005, more than 200 companies have undertaken internal investigations into their historical stock option granting process or were the subject of a federal investigation. However, John Despriet, litigation department chairman at Smith, Gambrell & Russell LLP, has told CFO.com that it’s more likely today that fewer than 120 of such investigations are still ongoing.

Meanwhile, the SEC enforcement division has also been mired in 47 new cases involving insider trading, according to Bloomberg. The commission has filed one more case than in 2006, Thomsen said. The regulator is also paying close attention to 10b5-1 plans that protect executives from insider-trading accusations by allowing them to sell stock automatically at pre-arranged intervals.

Indeed, the SEC has cracked down on several so-called pillow-talk cases, by settling insider-trading charges that spouses or relatives have illegally shared confidential information about a company. At least one case involved a father and son, who later settled SEC charges of illegally insider trading securities of three public companies.

Thomsen also chalked up the higher number of enforcement cases this year to a string of cases involving audit firms that had not registered with the Public Company Accounting Oversight Board, as required under the Sarbanes-Oxley Act. The 69 cases involved individual CPAs and firms. Of the firms charged, 28 settled with the SEC without admitting or denying that they had audited public companies while not registered with the PCAOB.